The full story...

Has the RBA backed the wrong horse?

MARK COLVIN: The latest data on the economy show construction activity going backwards in the final three months of last year.

The Reserve Bank has previously said it's relying on the construction sector to fill the growth gap that will be left behind as mining investment slows down. So has Australia's central bank backed the wrong horse?

Here's finance reporter David Taylor.

DAVID TAYLOR: Australia's economy is forecast to grow below trend. The Reserve Bank has backed the construction sector to come through for the economy. This is what the bank said in a statement earlier this month.

EXCERPT FROM RBA STATEMENT: A gradual recovery in residential construction investment looks to be underway, as lower interest rates, rising rental yields and an improvement in conditions in the established housing market have created a more favourable environment for investment.

DAVID TAYLOR: But today's figures show the sector is not out in front. In fact figures for the December quarter show construction work done fell 0.1 per cent. A drop-off in engineering and mining construction was mostly to blame.

That's not surprising, we know the mining boom is slowing down. What was unsettling was the small amount of growth recorded in the housing construction market.

Building products company James Hardie has a vested interest in the Australian housing market. It released its third quarter results today. The company said conditions in Australia remain subdued, and it doesn't expect a pickup anytime soon.

Louis Gries is the chief executive of James Hardie.

LOUIS GRIES: Australia's going to have the toughest challenge from a market perspective.

DAVID CANNINGTON: It doesn't surprise me that we're hearing this sort of announcements because I think housing construction and the housing market has found conditions quite difficult over the last couple of years.

DAVID TAYLOR: David Cannington is a senior property analyst with the ANZ Bank. He made a comprehensive list of the headwinds facing Australia's residential construction industry.

DAVID CANNINGTON: The growth that we'll expect to see in housing construction will be tempered by some moderate house-price growth, but also it'll be weighed down by increases in building costs and difficult building approval processes.

DAVID TAYLOR: It seems like a bit of an elephant in the room, doesn't it? You've got the Reserve Bank saying that housing construction does need to pick up in order to fill the gap that is going to be created from mining investment dropping off, there has been some growth in housing construction, but it's not enough. Is that fair enough to say? That we're just, there is that hole in the economy that just hasn't been filled yet, and may not be filled.

DAVID CANNINGTON: Yeah, that's true. If you look at where housing construction has been travelling, and compare that to underlying demand for housing, I guess the point is that we're not expecting the pickup in building construction to be as strong as it has been in the past.

DAVID TAYLOR: The Reserve Bank meets again next Tuesday to set interest rate policy. It'll be another opportunity for the bank to make an official comment on where it expects Australia's next growth opportunity to come from.